Start-Up Fever in N.C. - Sign of Things to Come?

At least seven new banks plan to open their doors this year in North Carolina, a sharp jump from recent years that could signal the banking industry's next round of start-up banks.

In the face of a 20-year decline in the number of banks nation-wide, these entrepreneurs believe they will be just the first of many that will snap up the crumbs left behind by big-bank mergers.

"I would not be surprised to see the number (of new banks in N.C.) double within the next 12 to 18 months," said R. Steve Aaron, president and chief executive of Catawba Valley Bank of Hickory, N.C., which plans to open on Nov. 1. "Banking is just like any other business - when there's a void, someone is going to move in to fill it."

Heavy consolidation and a buoyant economy historically have been the ingredients for new bank formations, and these factors have come together again in the mid-1990s, particularly in North Carolina, experts said.

The state, with possibly the most consolidated bank market in the country, hasn't seen any new banks in nearly three years and never had more than seven in any given year during the past 15 years.

But the principal investors in these latest efforts, whose banks are in various stages of formation, all believe the time is right once again for bank start-ups.

Historical trends support them. Looking back over the past 50 years, the number of de novos nationwide has risen to a peak almost exactly every 10 years, before decreasing through acquisitions or failures. The last peak year was 1984, which saw 393 banks formed - the most since 1934. That number has declined dramatically every year since, reaching as low as 59 in 1993.

While 1994 was not consistent with the ten-year cycle as being a peak year, it was nevertheless the first time in a decade that the number of new institutions has increased - to 68.

"They work in tandem with economic cycles," said Ray Grace, examiner in the North Carolina Office of the Commissioner of Banks. "As the weaker sisters get acquired, the number of state banks will run down until it reaches the pit. Then the de novos start back up again in response to that."

While most of those interviewed believe new-bank formations will never reach the numbers of the early 1980s - or any of the previous peak years when at least 300 new banks were formed - they said 1993 was likely the "pit," and that what is occurring at the moment in North Carolina could set the stage for more de novos to come.

"My sense is that its been accelerating in the last two years," said Warren G. Heller, research director at Veribanc Inc. in Wakefield, Mass. "We're constantly reading about large banks gobbling up the small ones. Well, this is just the other end of that. With less choice in a community, very frequently the response is to start their own bank, which prospers and then sells out for a big profit - and then the process repeats."

The Southeast, and North Carolina in particular, appears to have the most fertile ground for de novos in the country. In 1994, for example, Florida led the nation with eight new banks - six of which were savings banks - and Tennessee was second with seven. Half the states in the country did not have any new banks last year.

Why North Carolina? Most agreed there are three main reasons, all of which are interconnected: a strong economy, rampant consolidation, and the availability of quality personnel.

The record profits generated in North Carolina banks during recent years have emboldened those institutions, leading to more acquisitions, which in turn have displaced a horde of bankers in senior management positions, observers said. Those bankers have been the primary initiators of the subsequent start-ups.

The merger of Southern National Corp. of Lumberton and BB&T Financial of Wilson, in particular, which was completed in February and created a $20 billion-asset company, was cited by several of the de novo organizers as one of the key factors behind the latest wave of new banks.

"I think that merger was the catalyst," said Mr. Aaron. "These were the biggest players for some years in the state, and when they combined that displaced a lot of top managerial people. There were just not enough slots in both companies eventually."

Mr. Aaron was one of the roughly 1,000 employees out of a job after the merger. He had been a senior vice president at Southern National, but resigned in January after he saw that his responsibilities would shrink in the newly merged company. He previously had been president of a thrift, which two years ago was bought by Southern National, and wanted to return to heading up a small bank, he said.

And mergers in the state show no signs of slowing, as evidenced by First Union Corp. of Charlotte last week buying the state's largest thrift, $810 million-asset RS Financial Corp. of Raleigh.

"What you're seeing is what everyone anticipated," said Paul H. Stock, executive vice president and counsel for the Community Bankers Association of North Carolina. "As soon as there is no local bank in town, then the local movers and shakers get together and form one."

These people of influence were likely inspired by the initial success of the first start-up in this recent group, the First Gaston Bank in Gastonia, which began raising capital last summer.

The bank, which had hoped to open in February but has been held up by construction delays, raised $8.2 million in about three months, significantly more than it had expected.

"We were the first ones, and so we must have been encouraging to the rest of them after our public offering," said W. Alex Hall, who will be president and chief executive. "I think what (the growth of de novos) shows is that there must have been a pent up demand out there."

The other start-ups, most of which hope to open by the fall, would be located mostly in the central part of the state, from as far west as Hickory to as far east as Fayetteville. The locations consist of both the urban, big-bank dominated market of Charlotte as well as the small-town atmosphere of Cary, located outside Raleigh.

W. LeGrande Bennett Jr., who will be president and chief executive of Cape Fear Bank & Trust Co. in Fayetteville, is typical of these new bank executives. He lost his job as vice president of a $53 million-asset bank in town, when it was acquired by First Citizens Bank & Trust Co. of Raleigh three months ago.

"Some of my former customers approached me about doing it," he said. "They saw a need here for a local bank with local interests."

A new bank starting up in Greensboro, called Carolina Savings Bank, said it will be the first de novo savings bank in the state's history.

Scheduled to open by the end of October, Carolina Savings is also emblematic of the latest trend in the state: it plans to set up its headquarters in a shopping center office that will be abandoned this summer by Southern National.